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First Resources  SGX: EB5 - Downstream Division Gains Competitive Advantage

  • We expect First Resources to see stronger downstream contributions in the near term, from improved margins on the back of the recent change in export duty structure. However, this would be partially offset by weaker biodiesel margins.
  • Maintain NEUTRAL, new rolled-forward Target Price of SGD1.35 from SGD1.25, 2% upside with 2% FY20F yield.
  • First Resources is trading close to its historical mean currently, implying fair valuations.

First Resources Expects FFB Growth for FY20 to be on the Low End of the 0-5% Range

  • First Resources (SGX:EB5) expects FFB growth for FY20 to be on the low end of the 0-5% range, after recording a -3.9% y-o-y decline in FFB output in 1Q20. The company is not as bullish on FFB output recovery in 2H20F as some of its peers, citing the dry weather impact from 3Q19 being expected to still carry through somewhat in 2H20.
  • We make no changes to our FFB growth assumptions of 0.4% for FY20 and 6-7% for FY21-22.

First Resources Should be Able to Benefit From the Recent Change in Export Tax Structure

  • First Resources should be able to benefit from the recent change in export tax structure – as companies with downstream refineries in Indonesia would be at a greater competitive advantage compared to those in Malaysia. This is due to the fact that downstream refineries will be able to buy CPO feedstock at CPO minus export duty of USD55.00/tonne, while exporting its refined products with a lower export tax of USD35.00/tonne.
  • With that extra margin of USD20.00/tonne, downstream players are able to offer more competitive pricing to its customers.
  • As First Resources’s refineries were still running at 100% utilisation in 1Q20, we do not expect them to be able to increase sales volumes. However, refining margins could improve going forward, on the change in duty structure.

On the Biodiesel Front, First Resources Is Likely to See Lower Margins in 2H20

  • On the biodiesel front, First Resources is likely to see lower margins in 2H20, given the recent change in pricing structure for Indonesian biodiesel to CPO plus USD80.00/tonne (from USD100.00/tonne) from Jun 2020. It is unclear how long this change in pricing will be in effect – with some parties saying it is determined every month, while others expect it to last for three months.
  • Nevertheless, First Resources expects to still be able to make a comfortable margin with this price reduction, as methanol prices have come down in line with crude oil prices.

Maintain NEUTRAL

  • We make no changes to our forecasts, as we had already previously assumed a discount of 5-10% to Malaysian CPO prices for our CPO price assumptions in Indonesia. Despite our unchanged forecasts, we raise our First Resources Target Price to SGD1.35, after rolling forward our valuation period to Jun 2021F, to reflect a 1-year investment horizon.
  • Our Target Price implies an EV/ha of USD12,000/ha, which is at the mid-end of its peer range of USD10,000-15,000/ha.
Source: RHB Invest Research - 26 Jun 2020

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